FY19: Strong profit growth and cash generation

RESULTS FOR THE TWELVE MONTHS

ENDED 31 DECEMBER 2019

3 MARCH 2020

"Our 2019 results demonstrate the significant progress we have made to improve the Group's financial performance. We delivered underlying profit growth of 13%, driven by a strong performance in Rental Solutions, and a significant working capital improvement. We are proposing a 3% increase in the final dividend, reflecting the Board's confidence in the sustainability of our performance. We are well-positioned to meet our customers' evolving needs in the changing energy market, with 185 MW of hybrid work secured and 30 Y.Cubes now under contract, reflecting the growing interest in lower-carbon technology and our new battery storage product. Going forward we believe that a continued focus on the four strategic priorities first set out in 2015 will underpin the achievement of our mid-teens ROCE target in 2020 and beyond."

1Underlying excludes pass-through fuel and currency. A reconciliation between reported and underlying performance is detailed on page 9.

· Underlying1 Group revenue down 1% and in line with the prior year excluding the 2018 Winter Olympics and early design and project management revenue for Tokyo 2020 Olympics

· Operating profit of £241 million and profit before tax of £199 million, representing strong growth of 13% on an underlying1 basis and an underlying increase of 1.8pp in operating margin

o Rental Solutions underlying1 operating profit up 22% (55% of Group operating profit)

o Power Solutions Industrial underlying1 operating profit down 7% (27% of Group operating profit)

o Power Solutions Utility underlying1 operating profit up 21% (18% of Group operating profit)

· Operating cash inflow of £628 million supported by a significant working capital inflow of £107 million, reflecting increased focus and process improvements to drive cash collection in Power Solutions Utility

· ROCE improved year on year to 11.2% (2018: 10.3%), providing good momentum into 2020 with the Group on track to deliver mid-teens ROCE; we are monitoring the potential impact of coronavirus

· We continue to work closely with the Tokyo 2020 Olympic and Paralympic Games Organising Committees with preparations progressing as expected

· Strengthened financial position with net debt to EBITDA of 1.0x, down from 1.3x in 2018, despite the £101 million adverse impact of adopting IFRS 16 'Leases'

· Final dividend up 3% to 18.3 pence

· An update on our strategic priorities will be provided alongside our interim results in August

Group trading performance

Underlying1 Group revenue decreased 1%. Excluding revenue from the Winter Olympics in 2018 and early design and project management revenue for the Tokyo 2020 Olympics this year, underlying1 Group revenue was in line with the prior year. Underlying1 profit before tax was up 13% at £199 million. The operating margin was 14.9% (2018: 12.5%), with improved underlying margins in both Rental Solutions and Power Solutions Utility. Diluted earnings per share (DEPS) were 50.7 pence (2018: 49.2 pence), up 6% on an underlying1 basis.

The Group's return on capital employed (ROCE) increased to 11.2% (2018: 10.3%), despite a 4% reduction in the overall volume on hire and lower levels of utilisation. This was driven by an increase in the underlying profitability of Rental Solutions, as a result of higher rates in key sectors within North America, our emergency work in Belgium and an ongoing focus on cost efficiency and pricing discipline throughout this business, along with the benefit of the cost reduction programme in Power Solutions Utility. The increase in ROCE provides good momentum into 2020 and beyond, with the Group on track to deliver mid-teens ROCE in 2020.

Reported financial measures

Reported revenue and operating profit include the translational impact of currency as Aggreko's revenue and profit are earned in different currencies (most notably the US Dollar), which are then translated and reported in Sterling. The movement in exchange rates in the period had the translational impact of increasing revenue by £6 million and decreasing operating profit by £9 million.

In addition, the Group separately reports fuel revenue from certain contracts in the Power Solutions Utility business in Brazil and Sri Lanka, where we manage fuel on a pass-through basis on behalf of our customers. The reason for the separate reporting is that fuel revenue on these contracts is entirely dependent on fuel prices and the volume of fuel consumed, which can be volatile and may distort the view of the performance of the underlying business. In 2019, fuel revenue from these contracts was £27 million (2018: £172 million), with the year on year decrease due to lower fuel consumption in Brazil as contracts off-hired.

Reported Group revenue was down 8% on the prior year, with Rental Solutions up 1%, Power Solutions Industrial up 3% and Power Solutions Utility down 33%.

Outlook

Our underlying performance during 2019 provides good momentum into 2020 and our preparations for the Tokyo 2020 Olympic and Paralympic Games are progressing well. Notwithstanding this, we are monitoring closely the development and potential impact of the coronavirus outbreak, both in terms of the Tokyo Olympics and the Group more widely. At this point, however, we currently expect to deliver results in-line with expectations for 2020.

We expect to make further progress on working capital and will continue our capital expenditure discipline with expected fleet capital expenditure of around £200-£250 million. This, combined with our performance outlook, underpins our confidence in delivering our mid-teens ROCE target this year and beyond, and we look forward to providing an update on our strategic priorities alongside our interim results in August.

Divisional headlines

Rental Solutions underlying1 revenue was down 1%, with the year on year decrease driven by the Northern Europe and Australia Pacific regions. North America performed well, with revenue up 5% (up 12% excluding hurricane revenue in 2018) and a good performance in most of our key sectors, particularly oil & gas and building services & construction. Revenue in Continental Europe grew 3%, helped by work in response to power shortages in Belgium and the FIFA Women's World Cup in France. In Northern Europe our gas contracts in Ireland off-hired, as planned, and we also experienced continuing market uncertainty, while in Australia good growth in the mining sector was offset by a 100MW emergency contract in the prior year numbers. Rental Solutions operating margin of 15.9% was up 2.9 percentage points year on year on an underlying basis as a result of higher rates in key sectors within North America, our emergency work in Belgium and an ongoing focus on cost efficiency and pricing discipline throughout the business.

Power Solutions Industrial underlying1 revenue increased 2%. Excluding both the 2018 Winter Olympics in the prior year and the early design and project management revenue from the Tokyo 2020 Olympics in 2019, revenue was up 6%. We saw good growth in Latin America (up 3%), Middle East (up 10%) and Africa (up 29%). As previously disclosed, Eurasia had a challenging year with revenue down 8% due to slower order intake and pressure on rates from increased competition. Revenue in Asia also decreased 17%, mainly driven by South Korea (excluding 2018 Winter Olympics) due to a reduction in oil & gas, mining and events. Power Solutions Industrial operating margin was 14.8%, with the underlying decrease of 1.4 percentage points on the prior year primarily driven by Eurasia, where we saw pricing pressure as a result of increased competition and a reduction in the number of available market opportunities.

Power Solutions Utility underlying1 revenue was down 5% due primarily to off-hires in Africa (including Angola, Benin and Mozambique) and Myanmar. Underlying operating margin was up 2.9 percentage points to 13.3% as a result of the ongoing cost reduction programme. We have made good progress during the year in managing our trade receivables in this business, with collections of $584 million compared with amounts invoiced of $484 million, and active ongoing engagement with our customers continues to be a key priority.

Cash flow and balance sheet

During the year cash generated from operations was £628 million (2018: £423 million). The increase in operating cash flow is mainly driven by a £163 million year on year improvement in working capital cash flows (2019: £107 million inflow, 2018: £56 million outflow). The 2019 £107 million comprised a £78 million inflow from trade and other receivables, a £21 million inflow from trade and other payables and a £8 million inflow from inventory. EBITDA also increased £47 million, although this was partially offset by a £24 million higher cash outflow relating to mobilisation (fulfilment assets) and demobilisation activities. The higher fulfilment and demobilisation cash flows in 2019 primarily relate to contracts in Brazil and Burkina Faso, as well as the Tokyo 2020 Olympics.

The decrease in trade and other receivables of £78 million included a £93 million decrease in Power Solutions Utility (2018: £1 million decrease) which reflects an increased focus and implementation of process improvements to drive cash collection in this business. This was partially offset by a £10 million increase in Power Solutions Industrial (2018: £2 million increase) reflecting activity levels and some prepayments in the period relating to the Tokyo 2020 Olympics, together with a £5 million increase in Rental Solutions (2018: £9 million increase). Despite this slight increase in the year, Rental Solutions has made good progress in reducing the level of unbilled revenue that had built up through the end of 2018, and reducing its trade receivables balance continues to be a key focus for 2020.

In Power Solutions Utility, the level of our bad debt provision is broadly unchanged at $81 million (2018: $83 million) and we remain focused on managing the trade receivables which have risen over recent years, primarily as a result of our customers' limited liquidity and access to foreign currency.

The various initiatives established during last year drove an £8 million decrease in inventory, mainly in Power Solution Utility, which was partially offset by an increase in Power Solutions Industrial as we prepare for the Tokyo 2020 Olympics.

The increase in trade and other payables balances was primarily as a result of deferred revenue for the Tokyo 2020 Olympics, partially offset by lower trade and other payables on our fuel contracts in Brazil due to lower fuel consumption as these contracts off-hired.

Fleet capital expenditure was £189 million (2018: £196 million), representing 0.7 times fleet depreciation (2018: 0.7 times). Within this, £71 million was invested in Rental Solutions, primarily in relation to temperature control and the ongoing renewal of our oil free air (OFA) fleet, and £118 million in Power Solutions, which included our ongoing fleet refurbishment programme and £26 million of investment related to the Tokyo 2020 Olympics.

Net debt was £584 million at 31 December 2019. This was £102 million lower than the prior year, despite the recognition within net debt of a £101 million lease creditor following the Group's adoption of IFRS 16 'Leases' from 1 January 2019. A detailed cash flow is included on page 17 of the financial statements.

Net debt to EBITDA at 31 December 2019 was 1.0 times (2018: 1.3 times, pre IFRS 16).

Capital structure and dividends

The objective of our strategy is to deliver long-term value to shareholders while maintaining a balance sheet structure that safeguards the Group's financial position through economic cycles. Given the operational risk profile of the Group we believe gearing of around one times net debt to EBITDA is appropriate, recognising that from time to time it may be higher than this as investment opportunities present themselves.

More detail on our capital allocation policy will be outlined as part of the update on our four strategic priorities alongside our interim results. Prior to this, and subject to shareholder approval, the Board is proposing a final dividend of 18.27 pence (2018: 17.74 pence) representing an increase of 3%. This will result in a 2% increase in the full year dividend to 27.65 pence (2018: 27.12 pence) per Ordinary Share, giving dividend cover (basic EPS divided by the full year declared dividend) of 1.8 times (2018: 1.8 times). This increase reflects the Board's confidence in the sustainability of performance, and its recognition of the dividend's importance in providing returns to our shareholders. The retained earnings of the Company as at 31 December 2019 were £416 million and the majority of these earnings are distributable.

Business data table

*Includes £101 million of right of use assets on adoption of IFRS 16 'Leases' from 1 January 2019

**Includes £101 million of a lease creditor on adoption of IFRS 16 'Leases' from 1 January 2019.

BUSINESS UNIT PERFORMANCE REVIEW

RENTAL SOLUTIONS

· Underlying1 revenue down 1%, but operating profit up 22%

· Improved operating margin of 15.9%, up 2.9 percentage points on an underlying1 basis

· ROCE of 16.7% reflects an underlying1 increase of 1.7 percentage points, driven by profit growth in North America

· Strong performance in key sectors within North America

North American underlying1 revenue was up 5% on the prior year (up 12% excluding hurricane revenue in 2018). Our sector focus has continued to drive growth and we saw good performance in most of our key sectors, particularly in oil & gas and building services & construction. This top-line growth enabled us to leverage our fixed cost base more effectively, supporting the business to an improved operating margin.

In our Australia Pacific business, underlying1 revenue decreased 13% as good growth in the mining sector was offset by a 100MW emergency contract in the prior year numbers. Despite this revenue reduction, our focus on cost efficiencies helped to drive an improvement in operating margin.

Our Continental European business grew underlying1 revenue 3%, supported by revenue earned from work in response to power shortages in Belgium and the FIFA Women's World Cup in France (which was partially offset by the Ryder Cup revenue in the prior year).

Underlying1 revenue in Northern Europe was down 15%, as data centre contracts in Ireland off-hired, as planned, together with the effects of continuing market uncertainty.

Operating margin on an underlying1 basis was up 2.9 percentage points, reflecting higher rates in key sectors within North America and our emergency work to support the power shortages in Belgium; this was despite lower fleet utilisation as a result of prior year hurricane work off-hiring. In addition, we have begun to realise the benefits of our investment in new systems and processes that enable us to focus on more profitable work and improve our ability to recover costs.

POWER SOLUTIONS

· Power Solutions Industrial

− Underlying1 revenue increased 2%; up 6% excluding the 2018 Winter Olympics and early design and project management revenue for the Tokyo 2020 Olympics recorded in 2019

− Underlying1 profit decreased 7%, driven by a challenging year in our Eurasia business

− Operating margin at 14.8% was down 1.4 percentage points on an underlying1 basis

− ROCE of 10.4% is down 0.2 percentage points on an underlying1 basis

· Power Solutions Utility

- Underlying1 revenue was down 5%, primarily due to off hires

- Underlying1 operating profit was up 21% as a result of improved operational performance

- ROCE up 1.1 percentage points to 5.8% on an underlying1 basis

Power Solutions Industrial

Power Solutions Industrial underlying1 revenue increased 2%. Excluding both the 2018 Winter Olympics in the prior year and early design and project management revenue for the Tokyo 2020 Olympics in 2019, revenue was up 6%.

Revenue in Latin America increased 3%, primarily driven by the mining and oil & gas sectors. In the Middle East revenue increased 10%, with good growth in Oman and Saudi Arabia, partially offset by Kuwait. Africa revenue grew 29%, driven by our local business in Nigeria and industrial projects in the Democratic Republic of Congo (DRC). As previously disclosed, Eurasia had a challenging year with revenue down 8% due to slower order intake and pressure on rates from increased competition. Revenue in Asia (excluding the 2018 Winter Olympics and Tokyo 2020 Olympics) decreased 17%, mainly driven by a reduction in work related to mining and oil & gas.

The operating margin, on an underlying1 basis, was down 1.4 percentage points on the prior year at 14.8%, primarily driven by pricing pressure and a reduction in the number of available market opportunities in Eurasia, partially offset by a good performance in Africa and Latin America.

Power Solutions Industrial order intake for the year was 506 MW (2018: 604 MW), including 282 MW in Eurasia (2018: 333 MW).

Power Solutions Utility

Power Solutions Utility saw underlying1 revenue decrease 5%, primarily due to off hires in Africa (including Angola, Benin and Mozambique) and Myanmar. The operating margin (excluding pass-through fuel) on an underlying1 basis was up 2.9 percentage points to 13.3%, primarily as a result of the ongoing cost reduction programme.

Average megawatts on hire were down 10% to 2,405 (2018: 2,683), impacted most significantly by projects off-hiring in Africa and Asia. The full year off-hire rate was 33% (2018: 42%). Order intake for the year was 497 MW (2018: 398 MW), including 150MW in the Philippines. In addition, we have agreed contract extensions with a number of customers including an agreement to extend our 200MW Ivory Coast contract until December 2021.

Managing the trade receivables in our Power Solutions Utility business continues to be a major focus, with active ongoing engagement with our customers a key priority. Encouragingly our Power Solutions Utility cash collections in the year were $584 million compared with amounts invoiced of $484 million. However, we continue to experience delays in receiving payments in Venezuela, Yemen and parts of Africa due to our customers' more limited liquidity and access to foreign currency. While we believe that we remain relatively well positioned to recover the Group's net exposure in Venezuela and Yemen when the current situation in each of these countries stabilises, we also recognise that there is a range of potential outcomes for each. The customer with whom we have our largest net exposure (in the range $30-40 million) is within the Africa region and, while there is no dispute over the amount outstanding, we remain in regular dialogue with this customer regarding the likely process and timing of future payments.

Overall the Power Solutions Utility bad debt provision at 31 December 2019 was $81 million (2018: $83 million). Although the overall provision is broadly in line with the prior year, to reflect the differing circumstances and payment progress made by customers, the Group has increased its provision against specific customers in Yemen and Venezuela by $8m, while reducing its provision against other customers by $10 million. In addition, we have revalued private placement notes relating to one customer in Venezuela (PDVSA) to £1 million (2018: £4 million).

FINANCIAL REVIEW

Currency translation

The movement in exchange rates in the period had the translational impact of increasing revenue by £6 million and decreasing operating profit by £9 million. Currency translation also gave rise to a £75 million decrease in the value of the Group's net assets. Set out in the table below are the principal exchange rates which affected the Group's profit and net assets.

(Source: Bloomberg)

Reconciliation of reported to underlying results

The tables below reconcile the reported and underlying revenue and operating profit movements:

Revenue

Operating profit

Notes:

1. The currency impact is calculated by taking the 2018 results in local currency and retranslating them at the 2019 average rates.

2. The currency impact line included in the tables above excludes the currency impact on pass-through fuel in Utility, which in 2019 was £5 million on revenue and £nil on operating profit.

Interest

The net interest charge of £42 million was £5 million higher than the prior year, primarily due to an increase in interest of £5 million associated with the adoption of IFRS 16 'Leases'. The lower average net debt has been offset by an increase in the effective interest rate and an increase in arrangement fees for refinancing committed debt. Interest cover (including the impact of IFRS 16) measured against rolling 12-month EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation) remained strong at 13 times (2018: 14 times).

Taxation

Tax charge

The Group's effective corporation tax rate for the year was 35% (2018: 31%) based on a tax charge of £70 million (2018: £57 million) on a profit before taxation of £199 million (2018: £182 million). The increase in the Group's effective tax rate in 2019 is largely due to the geographical mix of profits and the impact of non-recurring prior year credits in 2018.

Total cash taxes

In 2019 the Group's worldwide operations resulted in direct and indirect taxes of £272 million (2018: £241 million) being paid to tax authorities. This amount represents all corporate taxes paid on operations, payroll taxes paid and collected, import duties, sales taxes and other local taxes.

Cash flow

During the year cash generated from operations was £628 million (2018: £423 million). The increase in operating cash flow is mainly driven by a year on year improvement in working capital cash flows of £163 million (2019: £107 million inflow, 2018: £56 million outflow) and an increase in EBITDA of £47 million, partially offset by a higher cash outflow of £24 million relating to mobilisation (fulfilment assets) and demobilisation activities. The working capital movements in the period are explained in more detail on page 4. Capital expenditure in the year was £230 million (2018: £216 million), of which £189 million (2018: £196 million) was invested in fleet assets.

Net operating assets

The net operating assets of the Group (including goodwill) at 31 December 2019 totalled £1,997 million, £162 million lower than 31 December 2018, as detailed in the table below.

A key measure of our performance is the return generated from the Group's average net operating assets (ROCE). We calculate ROCE by taking the operating profit (pre-exceptional items) for the year and expressing it as a percentage of the average net operating assets at 31 December, 30 June and the previous 1 January. In 2019 ROCE increased to 11.2% compared with 10.3% in 2018. On an underlying basis ROCE rose1.1 percentage points, driven by a strong performance in Rental Solutions and the benefits of the cost-saving programme in Power Solutions Utility.

Property, plant and equipment

Our rental fleet accounts for £939 million, which is around 80% of the net book value of the Group's property, plant and equipment. The majority of equipment in the rental fleet is depreciated on a straight-line basis to a residual value of zero over eight years, with some classes of rental fleet depreciated over 10 and 12 years. The annual fleet depreciation charge of £265 million (2018: £273 million) reflects the estimated service lives allocated to each class of fleet asset. Asset lives are reviewed at the start of each year and changed, if necessary, to reflect their remaining lives in light of technological change, prospective economic utilisation and the physical condition of the assets. No changes were made in 2019.

Shareholders' equity

Shareholders' equity decreased by £8 million to £1,359 million, represented by the net assets of the Group of £1,943 million less net debt of £584 million. The movements in shareholders' equity are analysed in the table below:

Pensions

Pension arrangements for our employees vary depending on market practice and regulation in each country. The Group operates a defined benefit scheme for UK employees, which was closed to new employees joining the Group after 1 April 2002. Most of the other schemes in operation around the world are defined contribution schemes.

Under IAS 19: 'Employee Benefits', Aggreko has recognised a pre-tax pension surplus of £4 million at 31 December 2019 (2018: £1 million surplus) which is determined using actuarial assumptions. The improvement in pension funding is primarily driven by the additional contributions paid by the Company during the year. These were partially offset by the growth in liabilities being greater than the returns on the Scheme's assets. The Scheme's liability growth was primarily driven by a fall in interest rates, thereby reducing the discount rate applied to the liability, while all asset categories provided better than expected returns.

The sensitivities regarding the main valuation assumptions are shown in the table below.

Treasury

Liquidity and funding

The Group maintains sufficient facilities to meet its funding requirements over the medium term. At 31 December 2019 these facilities totalled £1,027 million, in the form of committed bank facilities arranged on a bilateral basis with several international banks and private placement lenders. The financial covenants attached to these facilities are that EBITDA should be no less than 4 times interest and net debt should be no more than 3 times EBITDA. The covenants exclude the impact of IFRS 16 'Leases' and, on that basis, at 31 December 2019, these ratios were 14 times and 0.9 times respectively. The Group does not expect to breach these covenants in the year from the date of approval of these financial statements.

Net debt (including £101 million of a lease creditor on the Group's adoption of IFRS 16 from 1 January 2019) amounted to £584 million at 31 December 2019 (2018: £686 million) and, at that date, un-drawn committed facilities were £516 million.

Further detail can be found in the Going Concern disclosure within Note 1 to the Annual Report and Accounts.

Risks

The Group's operations expose it to a variety of financial risks that include liquidity, the effects of changes in foreign currency exchange rates, interest rates, and credit risk.

The group manages its credit risk on cash deposits and other financial instruments by limiting the aggregate amounts and their duration depending on external credit ratings of the relevant counterparty.

Insurance

The Group operates a policy of buying cover against the material risks which the business faces, where it is possible to purchase such cover on reasonable terms. Where this is not possible, or where the risks would not have a material impact on the Group as a whole, we self-insure.

Principal risks and uncertainties

In the day to day operations of the Group, we face various risks and uncertainties. We seek both to prevent these risks from materialising and to mitigate their impact if they do arise. The Board has developed a risk management framework to facilitate this. The principal risks that we believe could potentially affect the Group are summarised below:

· Global macroeconomic uncertainty;

· Market dynamics;

· Technology developments;

· Talent management;

· Change management;

· Climate change;

· Health and safety;

· Cyber security;

· Service delivery : major contractual failure;

· Escalating sanctions; and

· Failure to collect payments or to recover assets.

This year two risks were added to the Group's register of principal risks and two were removed.

Risks added to the Group's register this year:

· Climate change: We have isolated the contribution to the Group's aggregate level of risk that is attributable to climate change. This has been done to reflect our increased focus on this issue.

· Service delivery - major contractual failure: This risk returned to the Group's Register of Principal Risks at the half year. The severity of this risk fluctuates with the number, scale and scope of major contracts that we are delivering at any time. The successful delivery of the Japan Olympics is a key priority for 2020 with associated risks gaining additional scrutiny as a result.

The risk scores of the following risks have fallen below the threshold for inclusion in the Group's Register of Principal Risks. In both cases, additional control measures have been put in place to reduce the likelihood of a risk event occurring.

· Security: Our Group security policy sets the standards in this area. Our Group security team provides guidance and monitors the security environment. In 2019, additional security training, security audits and a security incident reporting app were implemented.

· Failure to conduct business dealings with integrity and honesty: In 2019, a new code of conduct and associated training, increased oversight of third-party sales representatives and an improved supplier onboarding process were implemented to strengthen our compliance framework further.

These risks remain on the risk registers of the relevant business units and corporate functions and, given their nature, will continue to be areas of focus for the Board.

UK withdrawal from the European Union

The UK has now left the EU and is currently in a transition period until the end of 2020 while the UK and the EU negotiate additional future arrangements. At this point we do not know what the result of these negotiations will be or whether the current transition period will be extended.

We have completed an impact assessment to try to identify the aspects of our business that might be affected most by the UK's withdrawal from the EU. We do not expect the impact on the Group's business activities to be material because the large majority of them take place outside the UK and the EU. However, we have taken some actions and developed contingency plans to reduce the potential impact on the Group of the UK leaving the EU without a new trade agreement at the end of December 2020.

Delays in our supply chain and in the export of finished products, changes to customs duties on the movement of equipment, changes to tax legislation and the associated system changes have the potential to affect our business the most, on top of the impact of changes in the value of Sterling and GDP growth in our UK and EU markets.

The Group earns approximately 5% of its revenue from the UK and 11% from EU markets. Demand for our services in these markets is, in part, GDP dependent. A significant change in the GDP growth in these markets is likely to have a knock-on effect on our level of activity there. We will continue to monitor the situation closely and refine our contingency plans as the situation develops.

Coronavirus

As the situation continues to evolve, our primary concern is for the welfare of our people, their families and the local communities in which we work. We are following the development of the coronavirus outbreak and have implemented several measures to protect our people and to prepare for possible consequences of the virus. It is unclear how the outbreak will develop and, therefore, the potential impact on our business. We will continue to follow developments closely and will take further action to protect our people and business as appropriate.

Shareholder information

Our website can be accessed at www.plc.aggreko.com. This contains a large amount of information about our business. The website also carries copies of recent investor presentations, as well as London Stock Exchange announcements.

GROUP INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2019

GROUP STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2019

GROUP BALANCE SHEET(COMPANY NUMBER: SC177553)

AS AT 31 DECEMBER 2019

The financial statements on pages 15 to 33 were approved by the Board of Directors on 3 March 2020 and were signed on its behalf by:

GROUP CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2019

i) Interest paid of £46 million (2018: £36 million) includes £5 million relating to leases (2018: £ nil).

Cash flows for the purchase and sale of rental fleet assets are presented as arising from investing activities because the acquisition of new fleet assets represents a key investment decision for the Group, the assets are expected to be owned and operated by the Group to the end of their economic lives, the disposal process (when the assets are largely depreciated) is not a major part of the Group's business model and the assets in the rental fleet are not specifically held for subsequent resale.

RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT

AS AT 31 DECEMBER 2019

Other non-cash movements include reclassifications between short-term and long-term borrowings, with £nil being reclassified from non-current to current borrowings and £24 million from non-current to current lease liabilities. The remaining balance is due to £25 million of new lease liabilities and £5 million of interest.

AS AT 31 DECEMBER 2018

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2019

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2019

NOTES TO THE ACCOUNTS

For the year ended 31 December 2019

1. CHANGES IN ACCOUNTING POLICY AND DISCLOSURES

(a) New and amended standards adopted by the Group

IFRS 16 'Leases'

The Group adopted IFRS 16 from 1 January 2019 and, therefore, this is the first set of the Group's annual financial statements where IFRS 16 has been applied.

Prior to the adoption of IFRS 16, leases where substantially all of the risks and rewards of ownership were not transferred to the Group were classified as operating leases. Rentals under operating leases were charged to operating profit on a straight-line basis over the term of the lease. IFRS 16 addresses the accounting for leases and requires lessees to recognise all leases on balance sheet with limited exemptions. This results in the recognition of a right-of-use asset and corresponding liability on the balance sheet, with the associated depreciation and interest expense being recorded in the income statement over the lease period. Limited exemptions apply for short-term leases (leases with a term of 12 months or less) and low-value leases (which have been defined as

The Group has adopted IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application (£nil) is recognised in retained earnings at 1 January 2019. Accordingly, the comparative information has not been restated and continues to be reported under IAS 17 'Leases' and IFRIC 4 'Determining Whether an Arrangement contains a Lease'.

Definition of a lease

Previously, the Group determined at contract inception whether an arrangement was or contained a lease under IFRIC 4. Under IFRS 16, a contract is, or contains a lease, if the contract conveys a right to control the use of an identified asset for a period in exchange for consideration.

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

- to grandfather the assessment of which transactions are leases. The Group applied IFRS 16 only to contracts that were previously identified as leases. Contracts that were not identified as leases under IAS 17 and IFRIC 4 were not reassessed. Therefore, the definition of a lease under IFRS 16 has been applied only to contracts entered or changed on or after 1 January 2019;

- the use of hindsight in determining the lease term if the contract contains options to extend or terminate the lease;

- the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases; and

- to exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application.

Accounting policy

On initial measurement the right-of-use asset is recognised at cost, which comprises the value of the lease liability adjusted for any lease payments made on or before the commencement date, less any incentives received, any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset. The right-of-use asset is depreciated using the straight-line method from commencement date to the end of the lease term. The right-of-use asset is periodically adjusted for impairment, if any, and any remeasurements of the lease liability.

The Group leases various properties, vehicles, plant and equipment. Rental contracts are typically for fixed periods from 3 to 7 years but may have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions.

On initial measurement the lease liability is measured at the present value of the future lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate as the majority of subsidiary debt is funded by Group borrowings and therefore this is the rate at which lessees obtain funding for the asset. In addition, given the types of leases entered and the geographies of the majority of the leasing activity the interest rates implicit in these leases would be expected to gravitate around the Group's incremental rate. If the discount rate increased or decreased by 0.5% then the lease liability would change by circa £1 million.

The lease liability is measured at amortised cost using the effective interest rate method and is remeasured when there is a change in the future lease payments arising from a change in index or a change in the original assessment made.

1. CHANGES IN ACCOUNTING POLICY AND DISCLOSURES CONTINUED

Each lease payment is allocated between the liability and finance cost. The finance cost is charged to the income statement over the lease period to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

The Group presents the right-of-use asset and lease liability on the balance sheet.

Lease payments associated with short-term and low-value leases are recognised on a straight-line basis as an expense in the profit or loss.

On transition to IFRS 16 the Group recognised an additional £104 million of right-of-use assets and £104 million of lease liabilities at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 January 2019. The Group's weighted average incremental borrowing rate applied to the lease liabilities on 1 January 2019 was 5%. This rate has remained at 5% throughout 2019. On transition the right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments, which were not material.

The recognised right-of-use assets relate to the following types of assets:

The recognised lease liability at 1 January 2019 is detailed below.

Impact for the period

The impact from applying IFRS 16 for the year ended 31 December 2019 was:

Income statement

· Improvement in operating profit of £3 million

· Increase in depreciation of £30 million

· Increase in interest costs of £5 million

· Reduction in profit before tax of £2 million

Balance sheet/cash flow statement

· Right of use asset included within property, plant & equipment of £98 million at 31 December 2019 (1 January 2019: £104 million)

· Lease liabilities of £101 million at 31 December 2019 (1 January 2019: £104 million)

· Net debt at 31 December 2019 is higher by £101 million

Ratios

· An increase in EBITDA of £33 million

· An increase in net debt/EBITDA of 0.1 times

· Reduction in Group ROCE of 0.4pp

Note 10 sets out more details on the Group leases.

IFRIC 23 'Uncertainty over Income Tax Treatments'

The Group adopted IFRIC 23 from 1 January 2019. There was no material impact arising from the adoption of this standard.

2. SEGMENTAL REPORTING

(a) Revenue by segment

Disaggregation of revenue

In the tables below revenue is disaggregated by geography and sector.

Revenue by geography

Revenue by sector

At 31 December 2019

2. SEGMENTAL REPORTING CONTINUED

(a) Revenue by segment continued

Revenue by sector

At 31 December 2018

(b) Profit by segment

(c) Depreciation and amortisation by segment

(d) Capital expenditure on property, plant & equipment and intangible assets by segment

Capital expenditure comprises additions of property, plant and equipment (PPE) of £255 million (including £25 million in relation to leased right-of-use assets) (2018: £216 million), additions of intangible assets of £8 million (2018: £10 million), acquisitions of PPE of £nil (2018: £13 million) and acquisitions of intangible assets of £nil (2018: £1 million).

(e) Assets/(Liabilities) by segment